TOPICS > Economy

In a Weak Economy, Why Is CEO Pay on the Rise?

October 4, 2011 at 12:00 AM EDT
Median executive compensation has more than quadrupled over the last four decades, even through the latest financial crisis. Margaret Warner explores how CEOs can still command such salaries and benefits in light of the recession with Michael Faulkender of the University of Maryland and James Stewart of The New York Times.

JUDY WOODRUFF: Next, big-time CEOs and the big paychecks that they’re taking home. Margaret Warner has the story.

MARGARET WARNER: The outrage of the “Take Back Wall Street” protesters in New York and others around the country are in no small part connected with huge executive pay. Median executive compensation has more than quadrupled over the last four decades, even through the financial crisis, while non-supervisory workers have seen a 10 percent decline.

Now, from new disclosures required by the Securities and Exchange Commission in corporate reports, we’re learning more about what’s behind these pay packages, as well as the so-called “golden parachutes” for CEOs who’ve been fired. One noteworthy example of those, just last week, the fired CEO of HP, Leo Apotheker, walked away with more than $13 million in severance while the company struggles.

For more on this, we turn to Michael Faulkender, a professor of finance at the University of Maryland, who’s published major studies about executive compensation, and James Stewart, an author and financial columnist for The New York Times. He wrote about the HP deal last weekend.

And welcome to you both. James Stewart, let me begin with you. First of all, flesh this out for us. How big is the gap now between top CEOs’ pay and average employees’?

JAMES STEWART, New York Times: Well, it just seems to get bigger and bigger, no matter what happens. The last numbers I saw from the Bureau of Labor Statistics, which I think covered through the end of 2010, indicated that in 2010, CEO pay on average went up over 27 percent, and for the average non-supervisory worker, it was hovering down around 2 percent. And I know plenty of people who didn’t even get that.

So the gap is accelerating. It is bigger than ever. And I think the — you know, people — the outrage is bigger because, you know, we’re in really hard times. And it’s very hard for people to understand why executives, even at companies who are failing, are taking home these multi-multi-million-dollar pay packages.

MARGARET WARNER: So Professor Faulkender, to you. What does explain it? What’s the rationale behind these ever-larger CEO packages?

MICHAEL FAULKENDER, University Of Maryland: Well, I think it’s important to recognize that the increase in compensation we’re seeing is not just limited to senior executives of major corporations, but we’ve seen it in a lot of industries. We’ve seen the difference between star athletes and the average player. We’ve seen increases in the amount of compensation that investment bankers are making compared to the average person in the banking sector.

So when you look at the ratio of what people on the extremes are earning, compared to what the average person in that profession is earning, that difference, that ratio has been increasing significantly over time. And so while on the one hand, it does seem like there are some practices that have led to some abuses, we’re also seeing that the top people in numerous professions are increasing their compensation significantly more than people in the middle.

MARGARET WARNER: But now, the companies say it’s necessary to either recruit or retain top talent. You, however your — one of your studies looked at the methodology by which they decide, what’s the going rate for the top talent. And you found something that suggested it was a little skewed. Explain that.

MICHAEL FAULKENDER: That’s right. There does seem to be some evidence that when firms benchmark themselves against other firms that they select — they select competitors that are more likely at the higher end of the pay distribution than at the lower end.

So whenever you think about setting pay for an executive, you need to provide them sufficient amounts such that they will stay in the position or want to take a new position with your firm. And in doing so, you compare the pay package you’re offering to what people at other firms make.

But what we’re seeing is that they’re more likely to compare to highly paid CEOs at competitors, rather than the lower paid members of that same industry.

MARGARET WARNER: And sometimes not even competitors in the same business, right?

MICHAEL FAULKENDER: That’s right. In fact, what the recent SEC disclosures are telling us is that now that they have to document the firms against whom they benchmark, we’re seeing more than half the firms coming from — that they benchmark against coming from outside of their industry.

MARGARET WARNER: Now, James Stewart, you wrote this weekend with some passion about the HP case and severance packages. Are you seeing the same kind of — use that as an example, and other ones — the same kind of thinking, perhaps distortion, reflected in the way severance packages are set?

JAMES STEWART: Well, you know, I think it’s just outrageous, and I would think that most people could agree. I mean, maybe people deserve to be paid a great deal of money for succeeding and doing very well and making money for lots of shareholders, but how about out-and-out failures? Should they be paid millions of dollars when they’re fired? And yet this is an increasingly common practice.

And it was vividly on display at Hewlett-Packard last week when they fired their chief executive, gave him a severance payment of over $13 million and let him keep roughly $10 million he’d been paid to lure him there, to sign on, for a total — a grand total of about $23 million for 11 months of work that was, everybody agreed, an abject disaster.

Now what explains that? You know, it’s — the boards have simply, you know, abdicated their responsibility here. They do look at comparative examples where other people get these lavish severance bonuses. And they claim they need to give them these guarantees to get them to leave other jobs.

But in his case, he didn’t even have another job. He’d been fired as CEO at his last company. So he didn’t need a guarantee to get him out of there. And yet that is the boilerplate that is creeping into these contracts.

MARGARET WARNER: James Stewart, staying with you, up in New York where you are, we have these protests on Wall Street. And people there are comparing, you know, the large salaries to corporate executives versus their own sense that they’re kind of falling behind. Is it provable that if CEOs here didn’t get these huge payments that there would be enough to raise everyone’s salary, or is it kind of a drop in the bucket?

JAMES STEWART: Well, it really is — it’s — there aren’t enough of them. It’s — even though the numbers are huge for individuals, it’s a drop in the bucket when you look at total revenues and total payrolls for a giant company like HP or many of the other Fortune 500 companies.

So — but I can understand why they’re so upset. It’s the principle of the thing. This system is insane. And why does it only benefit the wealthy, whereas the average working person, if they get fired, they’re lucky to get two weeks to take home. They don’t get lavish pay. They don’t get paid more to fail than if they succeed.

This system has been completely stood on its head. And this, I think, is an abuse. We’ve been waiting for decades for the free market to do something about it. It clearly isn’t working. And I think it’s time for government regulation to step in and at least attack some of the most egregious abuses such as pay for failure.

MARGARET WARNER: And Michael Faulkender, as you said, there’s new disclosures are now being required. Is there any evidence yet — fairly briefly, if you might — that the new disclosures and the outrage that people are expressing is moving, is prodding boards of directors or investor shareholder groups to try to rein this in?

MICHAEL FAULKENDER: I don’t think we’ve seen it yet. There’s some hope out there that with the introduction of “say on pay” that we might get more activism on the part of shareholders and shareholder advisory groups to limit some of these packages.

MARGARET WARNER: “Say on pay” is the sort of a checklist that shareholders have to sign off on.

MICHAEL FAULKENDER: That’s right. The pay packages of senior executives are placed before the shareholders in the annual proxy statement, and they’re given an opportunity to vote on it.

But I have to agree completely with what James was saying, that it’s really the pay for non-performance that is the abuse that I think that needs to be addressed and that we have not yet seen regulators — or, excuse me, shareholders and shareholder groups achieve success in doing that.

So that doesn’t indict all compensation packages, nor does it indict the benchmarking process that’s been used. But there are some structural issues that are potentially generating the abuses because when — it’s fine to pay CEOs when the firm does well, but when the firm does poorly, as in the case of HP, we really should not see these excessive packages being awarded.

MARGARET WARNER: All right. Well, Professor Michael Faulkender and James Stewart of The New York Times, thank you both.